Is Gold a good investment right now? (Singapore Investors – COVID 2020)

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I had quite a few queries on gold recently.

A lot more people seem to be interested in gold as an investment during this COVID crisis, especially with all the money printing and stimulus going on (and that will come).

I did this post on gold for Patrons a while back, so I figured I would share the article with you guys.

If you enjoy this article and want more of my latest thoughts, do consider supporting FH as a Patron! It’s just $10 a month, and you get access to my latest stock watch, and latest commentary and analysis on the markets!

Reader Query

What’s your views on sgd vis a vis USD?

My reason for asking this question:

  1. Gold, as you said is used to hedge the portfolio, will go up as USD is headed for a disastrous slide downwards.
  2. If we purchased SPDR Gold ETF ie GLD which is denominated in USD, if USD heads downwards and we hold gold in USD, wouldn’t it be better to hold gold in SGD if SGD is seen not slide as much as USD? (Would buying physical gold in SGD be a better option).

Response:

What is gold?

The key to understand with gold is that this isn’t like a stock. Gold doesn’t generate any underlying cash flow. Gold is a metal that just sits there.

The value of gold though, comes from the fact that humans choose to accord value to this yellow metal. It’s hard to explain why this is the case, but it has been the case for thousands of years. Humans find this shiny object to be valuable, I don’t believe that this will change in the near future, but feel free to disagree with me on this.

Gold, just like bitcoin or fiat currency (eg. USD / SGD), doesn’t have any intrinsic value, the value comes from people’s perception of value. This is in contrast with things like food, iPhones, tools, which actually do have intrinsic value.

So in 2020, where does the value of gold come from? The real value of gold, just like bitcoin, comes from the fact that people perceive this metal to be valuable, and the supply is fixed / constant.

And this matters, because the other traditional store of value, fiat currencies, does not have a fixed supply.

The USD is the current reserve currency of the world. A bit of background here is required. The USD went through 2 distinct phases.

Phase 1 – Gold backed currency

The first, was when USD was pegged to gold. So for every $1 USD, you could bring that dollar to the bank, and exchange it for a certain amount of gold.

So under this system, gold is the ultimate store of value, and the value of the USD comes from the fact that is has a fixed rate in relation to gold.

Under this system, the total supply of USD cannot grow faster than the gold supply.

Of course, that didn’t stop the central bank from doing it anyway. So they printed more USD, and the supply of USD went up relative to the amount of gold the US had

This meant that the gold exchange rate was not sustainable. If everyone holding a USD took it to the bank to exchange it for gold, the bank would run out of gold. Once shrewd investors realized this, they started buying USD in bulk to exchange for gold, creating a run on the gold.

Eventually, the system broke because the US simply didn’t have enough gold relative to dollars, and switched to a Phase 2 system.

Phase I for the USD lasted from the 1930s up till around the 1970s, when the gold peg broke.

Phase 2 – Fiat Currency

Phase 2 is a Fiat Currency system. In this system, USD cannot be exchanged for gold. The value of the USD comes from the value that investors give to it.

USD, and not gold, becomes a store of value in itself. It is an artificial construct that market players choose to accord value to.

In this system, there is also no limit on the amount of new USD that can be created by the central bank.

The central bank can create as much USD as it wants, and investors will continue to hold USD for as long as they believe it to still hold value.

Phase 2 started with the breaking of the gold peg in the 1970s, until where it is today.

My belief is that we are approaching the late stage of Phase 2, and this system will end in the coming years.

It is not possible to predict the exact timing, or what will replace USD fiat currency as reserve status. But I do believe that COVID19 and the responses to COVID19 have sped up the timeline.

What is gold’s value as an investment under a Phase 2 system?

Under a Phase 2 system, gold has no intrinsic value, and its value comes from how valuable gold is, relative to the currency. This is important to understand.

Gold’s price differs based on the currency in which you are measuring it in.

One way to think of it is that gold has a fixed value. Imagine gold to be an iPhone. How much does this iPhone cost?

The simple answer is that it depends on the currency you are looking at it in. Let’s say it costs $1000 in USD. Using the current USD to SGD exchange rate, this means it costs $1400 in SGD.

But what if the value of the USD drops?

Because USD is a fiat currency, the Feds can print as much USD as they want. The more USD that is created, the less valuable USD becomes to investors. So at a certain point of money printing, investors will no longer want to hold USD, and the value of the USD will decline.

At this point, if the value of the USD drops by 10%, then the same iPhone will now cost $1100 in USD. USD has dropped relative to SGD by the same amount, so that $1100 is still $1400 in SGD.

It’s a simplistic example, but that’s the crux of it. Gold is a store of value, that holds value independent of fiat currencies. It’s why when you live in a country with hyperinflation, you want to make sure to hold either Gold, USD, or Bitcoin. Assets which are stores of value.

The other point to note, is that this is financial markets, and there is speculation. If investors believe that iPhones are a good store of value, and can be sold in a year’s time for the same “value” independent of the USD’s value, and they believe USD’s value will drop, they will rush to buy iPhones, driving up the price of iPhones.

So the increase value of the iPhone (or gold) comes from 2 aspects: (1) depreciation of fiat currency, and (2) speculation by investors.

More astute investors will point out that (1) does not really increase gold’s value, because gold retains its value, and it’s USD that loses the value. This is also correct.

So in a world where central banks and governments are happy to inject close to unlimited amounts of fiat currency into the economy, gold is a way to hedge again all that insanity. It retains its value even as fiat currency gets debased.

Coming back to the reader’s questions – How will gold perform vs USD / SGD? What currency to buy gold in?

It’s a fairly long description, but I wanted you guys to be able to understand the conceptual framework surrounding gold.

I’ll now give the short replies to the original reader questions below.

What’s your views on sgd vis a vis USD?

My original view was that the USD will appreciate against the SGD short term, but depreciate longer term.

I now believe that the USD appreciation short term is a low probability event, and even if it materializes will not last long.

Mid to long term, I believe the USD will depreciate against the SGD.

My reason for asking this question:

  1. Gold, as you said is used to hedge the portfolio, will go up as USD is headed for a disastrous slide downwards.
  2. If we purchased SPDR Gold ETF ie GLD which is denominated in USD, if USD heads downwards and we hold gold in USD, wouldn’t it be better to hold gold in SGD if SGD is seen not slide as much as USD? (Would buying physical gold in SGD be a better option).

After the discussion above, the answer to this is now clear. It really doesn’t matter what currency we buy gold in, because gold’s ultimate value is the same.

It is the value of currencies that changes.

Scenario 1 – If we hold gold in USD, the value of gold in USD goes up, but the value of USD against SGD goes down.

Scenario 2 – If we hold gold in SGD, the value of gold in SGD doesn’t go up as much, such that the SGD gains when translated back into USD results in the same gains as Scenario 1.

So from a theoretical perspective, there really is no difference what currency you buy gold in. Gold’s value is the same, it is the value of the currency that changes.

Of course, this is from a theoretical perspective, and in reality there are minor differences due to bid-ask spreads / liquidity issues. That said, most of the ETFs like GLD with good liquidity are USD denominated, so there are actually benefits to holding gold in USD.

Closing Thoughts: Is Gold a good investment?

And finally – just to share some personal thoughts.

I think the key to whether gold will be a good investment is what will central banks and governments do in the coming months.

Do they continue injecting easy liquidity, and do they pass new rounds of fiscal stimulus until COVID goes away?

If the answer is yes, then I like how gold if set up. If the answer is no, then the entire economy and financial markets are going to fall apart.

Of course, the answer in reality isn’t going to be so binary. It’s probably going to be somewhere in between.

But frankly, I don’t see any way out of this COVID crisis unless the we go further down the path of money printing. The alternative – Austerity, is going to be so costly and the consequences are going to be so unbearable that no government will be able to stomach it for long. They may try for a while, but eventually they will succumb and go down the money printing path. It’s just the easiest way out here.

And in a world with unlimited money printing, I like the risk-reward of gold. It’s not an investment by itself of course, but pair it with some stocks and some REITs and some cash, and it could be really interesting.

If you enjoy this article and want more of my latest thoughts, do consider supporting FH as a Patron! It’s just $10 a month, and you get access to my latest stock watch, and latest commentary and analysis on the markets!


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6 COMMENTS

    • Yes and no. Yes because it’s USD denominated as you mentioned. But no because you need to look at the underlying assets. Eg. If the underlying assets are GBP denominated, then the USD depreciation shouldn’t impact it significantly because the underlying assets are not USD denominated. So you will need to look at each ETF on a case by case basis on where the underlying exposure is.

  1. Hi FH,

    Should i be worried with USD tanking due to Marcos, it will become less attractive to us investors that It will reach a point in future that it is no longer profitable?

    Or should this be just a drop, that the usd will actually recover after recovering from the virus?

    • Well it depends on what you’re investing in. For stocks with a large % of earnings that are outside the US, a weaker USD will boost earnings, which counteracts your USD loss.

      So it’s not such a straightforward analysis. Personally, I think we may eventually see a brief spike in the USD, but the longer term trajectory for the USD here is probably down because of all the money printing.

  2. Hi FH,I’m currently looking at gold ETFs & Emerging Markets internet & E commerce listed under Irish-domiciled by HANetf.Im not sure if HANetf is considered a 3rd party for ETFs.What is yr view on this.Also,I’m keen on IUHC.LN as well coz EP is reasonable.Thanks.

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